HSBC HoldingsSteven Major, global head of fixed-income research, has always been known for his bond bulls. At the moment, his judgment is extraordinarily accurate.
The HSBC veteran has been predicting for months that benchmark u.s. bond yields could fall to 1%, a position that has only recently entered the market. Few are as bullish as he is. Analysts have a median forecast of 1.8%, and more than a dozen analysts expect 2% or more.
"We don't expect 1 per cent to be eye-catching," Major, 57, who is based in Hong Kong, said in a telephone interview. "We don't know where 2% of the forecast comes from, which is not consistent with our model."
Markets are fascinated by where US yields will go: whether rising inflation around the world is temporary or persistent, and how central banks will respond to price pressures during an economic recovery. For Major, the brightest signs of economic recovery may be over, with the resurgence of global outbreaks weighing on the economic outlook.
"I think we are likely to see an economic recovery and a loss of momentum in the data," Major said. The confidence data may have peaked. News about the epidemic and its impact on growth is also intensive. This is the current theme. "
This week, novel coronavirus's continued spread called into question optimistic economic forecasts and heightened market worries about economic growth. Yields fell sharply, with the benchmark 10-year Treasury yield trading around 1.14 per cent on Tuesday, down 63 basis points from a 14-month high in March.
All of a sudden, 1 per cent no longer seems out of reach, and other analysts are starting to stand behind Major.
Major's theoretical basis contains a theme, and his judgment is particularly crucial. He said it would be difficult for the central bank to raise interest rates too high, given that the government faced a huge increase in debt in the early stages of the epidemic. This does not take into account long-term structural factors such as population and technology, which he believes will put pressure on inflation.
Even if the Fed raises interest rates to "stifle inflation in the cradle"-reinforced by data last week showing that core inflation rose at its steepest pace since November 1991-it is a pre-emptive move. This means that the highest level of interest rates may be lower than the current market pricing.